What avoiding the 'fiscal cliff' means to you

Did you stay up and root for the final vote on the “fiscal cliff” being averted? Were you holding your breath and hoping your side would win the battle of the wills? After weeks of harangues on both sides, it was a relief it was over. So here is the simple analysis of what happened with some of the puffs and pans from the so called American Taxpayer Relief Act. There are a lot of numbers listed, but that is how the bill was written.

Puffs: Certain expiring segments of the prior Bush tax cuts were permanently extended. The so-called marriage penalty will expand the 15 percent income brackets and also increase the standard deduction for those married couples that will file a joint return. The dependent child care credit allowing couples to work allows up to $3,000 of expenses for one child and up to $6,000 to those that have more than one child has also been extended indefinitely. In addition, the child tax credit which allows lower income filers the opportunity to claim as much of $1,000 for each child under the age of 17 has been extended for five years.

Pans: About two years ago, Congress lowered the employee portion of the Social Security Tax (FICA) from 6.2 percent to 4.2 percent. This 2 percent has not been extended and there will be arise in the payroll deductions beginning the first payroll of the year. This 2 percent can amount to a $1,000 for the year for those earning up to $50,000.

Puffs: Unemployment insurance that would have expired on Dec. 31, 2012 has been extended for another year. In addition, payments to physicians under Medicare will not be reduced as per originally scheduled.

Pans: There will be a new hospital insurance tax of .09 percent that will be asserted in addition to the other portion of FICA to those persons exceeding a threshold. In the case of a married couple filing jointly this tax will be levied on the combined wages of $250,000 or $125,000 on those filing a separate return.

Puffs: Those taxpayers who are in the lower tax brackets will still continue to retain the 15 percent tax rate for both their capital gains and dividends. In addition many in the middle class will find that the Alternative Minimum Tax (AMT) exemption has been permanently indexed for inflation. The new base rate will now be $78,750 for those filing jointly and $50,600 for single filers. This will take away the need to add “patches” every year by Congress.

Pans: In the meantime, a 20 percent rate for dividends and capital gains will be charged to those having income in excess of $400,000 up to $450,000 depending on marital status. But it doesn’t end there. Those in that category will find that their ordinary income will be subject to a new top rate of 39.6 percent. Those who meet the income plateaus and also have investment income will pay an additional 3.8 percent as part of a separate tax that will be charged to pay for the Affordable Care Act.

Puffs: The estate tax exclusion will retain its top of $5 million but the tax rate will increase from 35 to 40 percent. One-year extensions will continue for certain expenses for teachers, tuition and related costs, deduction for state and local sales taxes and other credits.

Observation: A friend is one who sees through you and still enjoys the view.